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Guidance on how to calculate damages in Japan

by Yuichiro Suzuki (KUBOTA – Japan)

The Grand Panel of the Intellectual Property High Court provides guidance on how to calculate damages based on “Infringer’s Profits” (Article102(2) of the Patent Act) and “Reasonable Royalty” (Article102(3) of the Patent Act). ( NeoChemir Inc., et al v. Medion Research Laboratories Inc. ( 2018 (Ne) 10063 ))

In Japan, Article 102(2) of the Patent Act presumes the profits gained by an infringer through the act of patent infringement (“Infringer’s Profits”) are the amounts of damages and Article 102(3) deems an amount equivalent to the amount that the patentee would have been entitled to receive for the working of the patented invention (“Reasonable Royalty”) to be the damages.

However, the interpretation and application of these articles are still somewhat unclear and need further clarification. Examples of such issues include the following: Since Article 102(2) is merely a presumptive clause, the presumption can be overturned in some circumstances. While Article 102(3) states that an amount equivalent to a license fee can be claimed, it is not clear how to calculate a reasonable royalty rate.

In this case, the interpretation of these articles was argued between the parties, and the Grand Panel provided guidance on how to calculate damages based on these articles.

Background

This is a case in which the Plaintiff who owns two patent rights (the “Patents”), sought compensation for damages on the basis of a tort of patent infringement against the Defendants, alleging that the Defendant’s Products fall within the technical scope of the invention.

Since the first instance court ruled that the Defendant’s Products infringe the Patents and the Patents are valid and acknowledged a part of the claim for compensation for damages, Defendants appealed and challenged the decision.

The Grand Panel dismissed the appeal and stated as follows.

Judgment

  • “Infringer’s Profits”

The court  ruled that Infringer’s Profits shall be an amount of marginal profit in which only an additional cost that was necessary and directly related to manufacture and sales of infringing products by an infringer can be deducted from sales figures of the infringing products, and the burden of proof is on the patentee’s side.

Further, the court also held that circumstances rebutting the presumption of Article 102(2) may include, for example, differences between patentee’s business and infringer’s business; the presence of competing products in the market; marketing efforts of infringer; and performance of infringing products, with the burden of proof on the infringer’s side.

  • “Reasonable Royalty”

The court  ruled that a “Reasonable Royalty” is considered to be minimum damages, which should be on a sales figure basis of infringing products by multiplying the sales figure by a royalty rate to be paid for the implementation and that the royalty rate should be higher than the normal royalty rate where a license agreement is made through negotiation -Thus, a reasonable royalty rate should be determined by comprehensively taking into account the following circumstances: royalty rate set in the actual license agreement for the patent (if available), or the average royalty rate in the industry; the value of the patent; contributions of the patent and the manner of infringement; and the competitive relationship between patentee and infringer as well as patentee’s business policy.

Comments

As mentioned above, this judgement made clear the rules regarding the calculation of damages and can practically be of referenced for calculating damages.

As for the calculation of damages, recently, amendments to the Patent Act were enacted. Before the amendments, it was not possible for a patentee to receive a separate Reasonable Royalty for the portion where the presumption of Articles 102(1) and (2) were overturned (because it exceeds the production capacity of the patentee). However, the amendments enable a patentee to receive the Reasonable Royalty separately for said portion of Article 102(1).

We think that due to this decision as well as the amendments to the Patent Act, presumed damages according to the Patent Act will be calculated higher, which will contribute to protection of patent rights in Japan.